On October 2, 2018, PJM Interconnection, L.L.C. (“PJM”) submitted a filing at FERC (“October 2 Filing”) in response to a June 29, 2018 FERC order invalidating PJM’s capacity market rules (“June 29 Order”). FERC found PJM’s existing capacity market rules unjust and unreasonable because they do not consider the impacts state subsidies have on PJM’s capacity market. In the October 2 Filing, PJM proposes two alternative methods in response to the June 2018 Order: an expanded Minimum Offer Price Rule (“MOPR”) and Resource Carve-Out construct.

In 2006, PJM established the MOPR to address concerns regarding the ability of new generators to artificially depress capacity auction clearing prices by submitting below-cost bids. There have been several FERC and court-related challenges to the MOPR since inception, including most recently in two proceedings initiated in 2016. First, in March 2016, a group of PJM generation owners filed a complaint pursuant to section 206 of the Federal Power Act alleging that the MOPR is unjust and unreasonable because it fails to address the impact of subsidized resources on the capacity market. Second, in April 2018, PJM proposed revisions to its tariff to address the price-suppressing effects of out-of-market support for particular resources. FERC consolidated the proceedings and issued the June 29 Order to address what it considers to be shortcomings in PJM’s capacity markets resulting from state subsidy programs that suppress capacity prices (see July 11, 2018 edition of the WER). Specifically, FERC found that PJM’s existing MOPR does not adequately address the price suppressive effect of resources receiving out-of-market payments to ensure a just and reasonable rate and as a result, FERC found PJM’s existing MOPR unjust and unreasonable. In the same order, FERC also established a paper hearing to address two approaches in which PJM would modify the MOPR for new capacity market rules to provide a solution in time for PJM’s next capacity market auction, the Base Residual Action (“BRA”), in May 2019. FERC invited parties to file initial and reply testimony, evidence, and/or argument in response to the MOPR-related solutions proposed in the June 29 Order.

In response to FERC’s proposals, PJM proposed in its October 2 Filing the adoption of an expanded MOPR coupled with a Resource Carve-Out (“RCO”). First, the proposed expanded MOPR would apply to all fuel and technology types and to both existing and new resources (a change from the original MOPR, which only applied to new gas-fired units). The RCO is an alternative to MOPR that is designed to offer states a means to support particular generation assets by removing them from the capacity market where, otherwise, offers from these resources would be subject to MOPR. The RCO is proposed as an alternative to MOPR that would permit subsidized resources to obtain a capacity commitment without having to clear the PJM capacity market — a concept proposed by FERC in the June 29 Order. In addition to the MOPR/RCO, PJM also proposed the Extended Resource Carve-Out (“Extended RCO”). The Extended RCO would combine the RCO with an explicit mechanism to restore PJM’s residual capacity market clearing price to the economically “correct” competitive level. The extended RCO would also include price formation rules in order to ensure that the market clearing price counters the price suppression that otherwise would result from a “stand-alone” RCO. PJM stated that proposed alternative, specifically the MOPR/RCO, includes terms and conditions necessary to ensure appropriate competition in the PJM capacity market.

In addition to PJM, several other parties filed initial submissions proposing revisions to the MOPR on October 2, 2018. Reply testimony, evidence, and/or argument is due by November 6, 2018. FERC committed to issue an order in the proceeding no later than January 4, 2019, to ensure the capacity market rules are in place by the May 2019 BRA.

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